By Bill Alpert
It's fortunate that people buy real estate investment trusts for dividend income, and not just stock appreciation.
The typical U.S. REIT returned 9% this year, or 13% with dividends, as measured by the MSCI U.S. REIT index. As everyone knows, the S&P 500 is up more than 25%. But some names have staged dramatic rebounds in 2024, including American Healthcare REIT, which is up 125%, and the office owner SL Green Realty, up 73%.
Next year will look pretty similar for the real estate trusts, according to the 2025 REIT Outlook issued Monday by analysts at KeyBanc Capital Markets.
The average REIT's total return in 2025 should range from 5% to 15%. Particular ones should do better. KeyBanc's favorites include American Healthcare, Extra Space Storage, and the office-oriented Cousins Properties.
Most REITs underperformed the broad market by a wide margin in 2024. But their cost of capital improved dramatically, say the KeyBanc analysts. Transaction activity has increased across many property types, and public REITs are accelerating their investments in recent months. Competitive supply from new construction remains subdued because of pinched bank lending, so that's another good thing.
But REIT valuations aren't particularly cheap, says KeyBanc. REIT earnings multiples are only slightly below the 22-times multiple of the S&P 500. And if the coming administration of President-elect Donald Trump cuts corporate taxes, then REIT businesses will lose some of their tax edge.
The average REIT dividend yield of 3.8% compares to risk-free money-market rates of about 4.25%. And the implied return of a typical REIT investment -- what real estate insiders call the "cap rate" -- isn't much better than the yield of a 10-year Treasury or an investment-grade bond.
KeyBanc analysts are picking their shots.
The Monday note includes an upgrade on Cousins Properties, to Buy from Sellfg. The Atlanta-based office REIT is increasing its levels of occupied space, and has used its strong balance sheet to invest in $1.1 billion worth of properties this year. The 4.2% dividend yield is well-covered. Cousins stock goes for a lower multiple than other office REITs, and KeyBanc thinks it can rise from a current $31, to $34.
Move-in demand was sluggish this year at Extra Space Storage, but the self-storage REIT maintained occupancy at a 94.3% level in October.
"This positions [Extra Space] well ahead of the 2025 peak rental season, " writes KeyBanc, "which should enable the Company to increase move-in rents as the demand environment improves." Extra Space has a 4% yield and broker thinks its stock can go from $156 today, to $178.
The senior housing and nursing homes operated by American Healthcare REIT will gain occupancy in 2025, says KeyBanc, with increased reimbursement from insurers.
The broker thinks Wall Street estimates for 2025 and 2026 earnings at American Healthcare are too low. When they're revised upward, the stock should rise from a current $28.50, to $35.
Write to Bill Alpert at william.alpert@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 17, 2024 14:37 ET (19:37 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments